A new Internet-era quick-money scheme has caught fire. Dozens of Web sites have popped up promising high-ticket electronic gadgets for pennies on the dollar. One promises a free laptop computer to anyone willing to pony up $50 for an electronic book. At another site, purchase of a $500 CD-ROM buys a chance to win $4,650 or a free plasma television. But there’s a catch: There may be only one winner for every 50 buyers. The sites claim they’re legitimate, but legal experts warn otherwise.
It's hard to know just how many people are caught up in the matrix systems, but the numbers are clearly substantial. A public forum attached to one of the top sites, EzExpo.com, had nearly 1,000 messages posted during the past week. Other sites list their current matrix rankings, indicating hundreds of participants.
And the operator of matrix site B-and-K.com, launched just this month, told MSNBC.com he pulled in $25,000 in just the first week of operation.
“It’s like the new eBay,” said Kurt, who spoke to MSNBC.com on condition his last name was not used. Kurt said he became overwhelmed with ethical concerns and pulled the site down after just seven days, and refunded all participants’ money.
Illegal or just a longshot?
The ethical concerns came, Kurt said, because operating a matrix site is uncomfortably close to running a Ponzi scheme, a form of fraud in which early investors are paid off with money from later ones. And even though Kurt said he cleared his operation with the Oregon State Attorney General’s Office before he opened his doors, and concluded the operation wasn’t strictly illegal, he said the sites all have to walk a litigious “thin line.”
Here’s how a typical matrix site works: A consumer pays $150 for an electronic book and the right to enter into a matrix for a “free” plasma television. The first matrix entrant gets the TV when 50 more people pony up $150. The second entrant wins when another 50 people enter, and so on. But the numbers get exponentially large quickly — the 20th entrant doesn’t win until a total of 1,000 people enter the game. And for the 1,000th person to win, 50,000 have to enter.
Ponzi schemes are illegal because such systems eventually collapse under their own weight — eventually, there aren’t enough newcomers to continue the payouts. A series of such schemes drew in nearly the entire population of Albania in the 1990s, and their collapse touched off riots.
Matrix sites claim they are distinct from Ponzi schemes because participants are buying something, usually an e-book, and go on to claim that entry into the matrix is merely a free gift.
Shadesmatrix.com, for example, puts it this way: “This is a website where you can buy eBooks online. We offer eBooks that cost $25, $30, $50, $100, $125, $175, and $225. As a promotion, each time an eBook is purchased, the customer is added to a free item matrix.”
Free gift a common tactic
But that’s a common tactic for con artists trying to circumvent the law, said James Kohm, assistant director of marketing practices for the Federal Trade Commission.
“Simply calling it a gift doesn’t change the nature of what you’re doing,” Kohm said.
Steven A. Richards, a lawyer who represents multi-level marketing companies for Grimes & Reese in Idaho Falls, Idaho, said there often aren’t clear legal tests for Ponzi schemes. But if the product sold has no value or very little value, and consumers wouldn’t buy it without the attached free gift, the scheme probably runs afoul of federal and state laws.
“Are people who are paying $100 really getting something of value in return for that $100, or is it some means to disguise the scheme, that’s the question,” Richards said.
Without a viable product that can generate revenues and profits on its own, any Ponzi-type structure is doomed to collapse, and that’s why they are illegal, Kohm said.
Kurt, who operated B-and-K.com, said the electronic books purchased by many participants are essentially worthless, and certainly can’t generate self-sustaining revenues.
“Most of those e-books say you have full resale rights or giveaway rights,” he said. “Most probably were obtained for free. And if people know how to look around the Internet, they can get the same e-books for free.
“I don’t believe any sales (on my site) were generated based on the e-book,” he added. “People were putting their money in to win a prize.”
In messages on discussion boards linked off of the EzExpo site, some participants concede the e-books sold there are worthless.
“Basically, a business should be based around the products being sold, not the incentive which is the way it is now. It’s obvious that is the whole point here,” writes one. “Stores often give away free gifts to customers to entice them to shop there, and this is what you’re passing this off as, but you’re not really focusing on that model enough, and this is why questions are constantly being raised.”
Most lose out
But Dwamian Mcleish, who runs ExtremeMatrix.com, insisted the products he was selling were valuable. At ExtremeMatrix.com, buyers can put spend $50 to $500 on a CD which contains information on running a small business. Mcleish said he started his site on Jan. 2 after being a participant at EZExpo.com, where he put up $100. He hasn’t “cycled” yet on EzExpo.
“If it takes me two lifetimes, I’m dedicated to getting everybody on my list their product,” he said.
That is, of course, not possible, since there is a finite number of people who can sign up with the site, and the last participants in have to lose. In fact, very few people who participate in straight-line matrix sites will get anything.
“If people are really buying the opportunity to obtain the laptop, obviously most people can’t do that,” Kohm said. “Only 2 percent of the people could get a laptop, if you’ve got to have 50 people under you. That means 98 percent of the people have to fail.”
Mcleish isn’t the only one who was inspired by EzExpo.com. An e-mail request sent to MoveMeUp.com was returned with instructions to seek comments from Damion Flynn, who was cited as the EzExpo.com operator.
In response to an e-mail request for an interview, a writer identifying himself as Flynn said he would only submit to an interview “If you do have an open mind are willing to put some of the positive parts of our incentive program (and other sites that have followed our lead).”
The writer didn’t answer follow-up e-mails.
$210,000 TO GO FOR A NEW TV
One of the concerns about the sites is that people entering a matrix may not really understand the math involved, and might not realize how little chance they have of winning if they are not one of the very first participants.
For example, at Expo4less.com, users pay $100 to get into the matrix for a 42-inch plasma television. According to the site, on one evening last week, a participant named Toan Mai was close to getting her $100 big-screen television, needing only seven more participants to kick in $100. Once Mai received the TV, someone named Gregg Neahring would be next — but not until another $5,000 was kicked in by 50 additional users. Gabriel Jenko, who was at the bottom of the list, needed some 42 more sets of 50 people to buy in, and at $100 each — in other words, Jenko is $210,000 away from getting his fantasy television.
Still, many participants are more than willing to spend hundreds of dollars to jump on the end of the line and wait their turn. Some even get in line multiple times — someone listed as Jeri Nelsen, for example, has paid $800 for eight slots in the plasma TV matrix at MyElectronics4.com
Confusion primes the pump
Jonathan, a plasma TV hopeful who’s bought in to several matrices, said he’s sure plenty of entrants are confused by the systems. He requested that his last name be withheld.
“People think if they sign up on the list, that once 50 more people sign up they get their TV,” he said. “But if you see your name in this list and you are 20 people down, you actually have to wait for 1,000 people.”
He’s still hopeful he might rise to the top of the list eventually, but thinks consumers should know the long odds involved.
“It’s gambling,” he said. “But I lost a lot of money on dot com stocks. How is this any different?”
And Kurt, who said he refunded $25,000 to consumers after his one-week foray into matrices, and said he actually lost $1,000 because of refund-related banking fees, admits confusion primes the pump at matrix sites.
“I ... know that there are too many people out there who don’t completely understand, and while you could say that’s their fault, I couldn’t feel comfortable being the one benefiting from their negligence,” he wrote in a message announcing the closing of the site. “It’s not much different then a casino or a lottery. There are some winners and lots of losers. ... It is mathematically impossible for everyone to receive their prize, even if the company lasted through eternity. I could not sleep at night knowing that while there were going to be some winners, people were signing up with the notion they were sure they were going to win as well. For some people, it just wasn’t going to happen.”
The message boards connected to EzExpo also contain a mixture of hope and trepidation from participants who aren’t quite sure what they’ve gotten into.
“I also was one of those people who thought I understood that if I was on a 20 person matrix, I would cycle when 20 people were under me,” writes another, who signed the note “Losing Faith.”
“I know now that it was wrong, and have figured it will probably be YEARS before I get anything as I am at/near the bottom of most of EZExpo’s lists. *sigh* Time to wait.”
What consumers should do
But for the remaining sites, getting a flurry of new participants is key to any hopeful “cycler,” and matrix users have found that eBay is their favorite advertising tool.
Last week, there were over 100 eBay auctions serving as thinly disguised ads for the various matrix Web sites. Most promised deeply discounted plasma televisions — listed with prices as low as 99 cents — and appeared under eBay.com’s plasma TV listing. And in some cases, ponzi schemers are using eBay to recoup their investments by selling information on matrix systems.
“INFO FOR HOW TO GET THESE GREAT ITEMS BRAND NEW FOR REALLY CHEAP,” says one ad, which fetched only $3.25. Other similar ads have fetched up to $25.
Selling information and Web addresses is against eBay’s terms of service, but the auctions are currently thriving on the firm’s site.
Consumers who are considering joining one the sites should think carefully about the numbers, the FTC’s said.
“Look around. If everybody who’s paying money into the system is hoping to get out more than they paid in,” he said. “Then you have a huge red flag.”
Unsatisfied consumers can also register complaints at the FTC’s Web site or with their state attorney general’s office. They can also request refunds from the participating sites; at least one consumer who contacted MSNBC.com said he received a timely refund from EzExpo.com
In the meantime, consumers should just stay away from any financial arrangement promising outrageous returns on small investments, said Ponzi expert Lewis Freeman, a Florida forensic accountant.
“Why are you betting 29 bucks on a computer? It makes no sense,” Freeman said.
His firm is one of many that act as “receivers” for the government after Ponzi and other similar schemes are found to be illegal. Receivers seize assets and attempt to return them to the victims — but generally, Freeman said, consumers get nothing back.
“There’s one rule to follow: If it sounds too good to be true, it is too good to be true.”